Norges Bank May Boost Krone Further as Inflation Crosses Target

Traders have been taking some profits on their long positions in the Norwegian krone this week, but the latest inflation data has given them a reason to rethink.

Norway’s February headline inflation published on Friday beat the highest analyst estimate and rose above the central bank’s recently lowered 2 percent target, triggering a rally in the currency of 0.7 percent against the euro. That was enough to reverse this week’s earlier slide.

Even if analysts point out that the underlying measure, which stood at only 1.4 percent annually, is more relevant to the central bank’s notion of longer-term developments in price pressures, there are other reasons to expect that the Norges Bank will turn more hawkish next week.

Swedbank AB points out that domestic inflation was around the target even if underlying inflation was below the central bank’s estimate. Norges Bank has proven tolerant to inflation temporarily running below its target which is contrary to its Riksbank neighbor. In addition, activity data has been in line or better than expectations, while the housing market shows signs of stabilizing.

“We therefore believe that Norges Bank will show a somewhat larger confidence in raising rates later this year, perhaps already in September,” said Anders Eklof, a strategist at the bank in Stockholm. “The krone may test 9.50 against the euro it lifts the near-term rate path at next week’s meeting, as we predict.”

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